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Why The Greek Crisis Could Be Good News For Lloyds Banking Group PLC

As the Greek crisis drags on, the markets are becoming increasingly nervous. 

But Lloyds’ (LSE: LLOY) shareholders shouldn’t be concerned. 

Now, I’m not saying that Lloyds will definitely benefit from Greece’s problems, but there’s a strong argument to suggest that it could.

It all depends on how central bankers react to the crisis. 

Central bank reactions 

It’s more than likely that to prevent the Greece crisis from spreading across Europe; the European Central Bank will continue, or increase its easy money, quantitative easing policies. The Bank of England could adopt the same approach. 

As a result, interest rates are likely to stay lower for longer, stimulating demand for loans. 

London property 

One of the more surprising trends that has emerged from this crisis is the Greek demand for homes in London. In the search for safe assets located outside the country, some wealthy Greeks have been snapping up London property since 2010.

One source mentions that the number of Greek investors inquiring about London property jumped five-fold at the beginning of this year. 

As one of the UK’s largest mortgage lenders, Lloyds will be set to benefit from any uplift in UK home sales. 

UK focused 

Since its bailout, Lloyds has been retreating from international markets, which should shield the bank from any fallout from the crisis.

What’s more, unlike some of the bank’s larger peers, Lloyds does not have a large, risky investment bank. Investment banks are likely to suffer the brunt of the losses if Greece does indeed default on its debts. 

So all in all, Lloyds is, to a certain extent, insulated from the Greek crisis.

Also, the group could benefit from an increased demand for lending, as well as rising property prices here in the UK as bankers and individuals react to the crisis. 

My favourite bank

Thanks to its simplified operating structure, Lloyds is my favourite UK bank. 

While other banks are becoming increasingly difficult to analyse and understand, Lloyds is focused on simplification. 

And this simplification should enable the bank to outperform many of its peers over the long term. Specifically, Lloyds has gone back to the traditional banking model of simply lending money out at a higher interest rate than the rate it gives its depositors. 

As a result, unlike many of its peers, Lloyds is now no longer subject to the performance of a risky investment bank, and the group’s focus on several key markets has reduced its regulatory burden. 

Numbers don’t lie

All you need to do is to look at the numbers to see that’s Lloyds new, simplified business model is paying off. 

Lloyds’ return on equity (ROE) — a key measure of bank profitability — hit 16% during the first quarter of this year, while many of the bank’s peers reported ROE figures in the low-teens.

Lloyds’ management is targeting a ROE of 13.5% to 15% by 2017. In comparison, Barclays is targeting a ROE of 12% and HSBC is targeting a ROE of “more than 10%”.

Income play

As Lloyds returns to growth, the company intends to return 60% to 70% of earnings to investors in the near future.

Analysts are predicting that the bank will earn 8.3p per share next year. A payout ratio of 70% would equal a dividend payout of 5.81p per share, a yield of 6.7%. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.